Question

Airline industry experts generally believe that because of the "highly competitive" nature of U.S. airline markets, it is usually impossible to pass on higher jet fuel prices to passengers by raising ticket prices.

What factors do you suppose contribute to making U.S. airline markets "highly competitive"?

Accepting the premise that U.S. airline markets are indeed highly competitive, analyze in both the short run and long run the difficulty of raising ticket prices when jet fuel prices rise.

Answer 1

*Answer:

Step-by-step solution

1. Step 1 of 2

   The U.S airline market is highly competitive and due to this factor it is difficult to pass on higher fuel charges to passengers.

   There are various factors that contribute to constraint:

   - High number of airline competitors.

   - Free entry and exist that gives the flexibility.

   - Complete information availability.

   Comment

2. Step 2 of 2

   In short run, the airline firms find it difficult to hike their prices because of competitors. There is first mover disadvantage in hiking price in competitive industry. The firm will run into losses, if it tries to charge what is prevalent in the industry, as a result, given the cost, revenue will declines and firms will incur loss. So, they take the price what is given in the market.

   However, in short-run it is possible that firm may incur profit due to economic advantage, but in the long-run free-market flexibility, will remove all the rigidity and bring the market in equilibrium with zero economic profit.

   ***Please like this answer so that I can get a small benefit. Please support me. Thankyou***